Detail on Porter’s 5 Forces

Porter’s Five Forces Model of Competition

Threat of
Threat of
New
New
Entrants
Entrants
 Threat of New Entrants

* Economies of Scale

Barriers to * Product Differentiation

Entry
* Capital Requirements
* Switching Costs
* Access to Distribution Channels

* Cost Disadvantages Independent

of Scale

* Government Policy
 Porter’s Five Forces Model of Competition

Threat of
Threat of
New
New
Entrants
Entrants

Bargaining
Power of
Suppliers
 Bargaining Power of Suppliers

Suppliers exert power

in the industry by:

* Threatening to raise
prices or to reduce quality

Powerful suppliers
can squeeze industry
profitability if firms
are unable to recover
cost increases
 Bargaining Power of Suppliers
Suppliers exert power
in the industry by:
* Threatening to raise
prices or to reduce quality
Powerful suppliers
can squeeze industry
profitability if firms
are unable to recover
cost increases
Suppliers are likely to be powerful if:
* Supplier industry is dominated by
a few firms
* Suppliers’ products have few
substitutes
* Buyer is not an important customer
to supplier
* Suppliers’ product is an important
input to buyers’ product
* Suppliers’ products are differentiated
* Suppliers’ products have high
switching costs
* Supplier poses credible threat of
forward integration
 Porter’s
Porter’s Five
Five Forces
Forces Model
Model of
of Competition
Competition

Threat of
Threat of
New
New
Entrants
Entrants

Bargaining Bargaining
Power of Power of
Suppliers Buyers
Bargaining Power of Buyers

Buyers compete
with the supplying
industry by:

* Bargaining down prices

* Forcing higher quality
* Playing firms off of
each other
 Bargaining Power of Buyers
Buyer groups are likely to be powerful if:
* Buyers are concentrated or purchases
are large relative to seller’s sales
Buyers compete
* Purchase accounts for a significant with the supplying
fraction of supplier’s sales industry by:
* Products are undifferentiated
* Bargaining down prices
* Buyers face few switching costs * Forcing higher quality
* Buyers’ industry earns low profits * Playing firms off of
each other
* Buyer presents a credible threat of
backward integration
* Product unimportant to quality
* Buyer has full information
 Porter’s Five Forces Model of Competition

Threat of
Threat of
New
New
Entrants
Entrants

Bargaining Bargaining
Power of Power of
Suppliers Buyers

Threat of
Substitute
Products
 Threat of Substitute Products

Products
with similar
function
limit the
prices firms
can charge
 Threat of Substitute Products

Keys to evaluate substitute products:

Products * Products with improving

with similar price/performance tradeoffs
function relative to present industry
limit the products
prices firms
can charge For Example:
Electronic security systems in place
of security guards
Fax machines in place of overnight
mail delivery
 Porter’s Five Forces Model of Competition

Threat of
Threat of
New
New
Entrants
Entrants

Bargaining Rivalry Among Bargaining

Power of Competing Firms Power of
Suppliers in Industry Buyers

Threat of
Substitute
Products
 Intensity of Rivalry Among Existing Competitors

Intense rivalry often plays out in the following ways:

* Jockeying for strategic position
* Using price competition
* Staging advertising battles
* Increasing consumer warranties or service
* Making new product introductions
 Intensity of Rivalry Among Existing Competitors

Intense rivalry often plays out in the following ways:

* Jockeying for strategic position
* Using price competition
* Staging advertising battles
* Increasing consumer warranties or service
* Making new product introductions

Occurs when a firm is pressured or sees an opportunity

* Price competition often leaves the entire industry worse off
* Advertising battles may increase total industry demand,
but may be costly to smaller competitors
Intensity of Rivalry Among Existing Competitors

Cutthroat competition is more likely to occur when:

* Numerous or equally balanced competitors
* Slow growth industry
* High fixed costs
* High storage costs
* Lack of differentiation or switching costs
* Capacity added in large increments
* Diverse competitors
* High strategic stakes
* High exit barriers
Intensity of Rivalry Among Existing Competitors

High Exit Barriers are economic, strategic and

emotional factors which cause companies to remain
in an industry even when future profitability is
questionable.

* Specialized assets
* Fixed cost of exit (e.g., labor agreements)
* Strategic interrelationships
* Emotional barriers
* Government and social restrictions